Credit scores may seem complicated, but they're actually made up of five simple factors: Payment History, Current Balance, Length of Credit History, Mix of Credit, New Credit. Master those, and a high credit score is in the bank.
We will discuss each of the 5 factors and the ways that you can improve them. Keep in mind that it is important to monitor your credit report regularly and address any errors immediately. You can get a free copy of your credit report once a year.
Payment History is the first factor and it shows how many times you’ve been late on an account by 30, 60, or 90 days. Payment history has a big impact on your credit score so it’s important to make sure that you’re always making your payments on time.
• One way to improve your payment history is to set up automatic payments for all of your bills that report to your credit. That way, you can be sure that they will always be paid on time.
• The payment history carries the heaviest weight in the scoring algorithm coming in at 35%.
Current Balance vs. Credit Limit
The Current Balance/Credit Limit is also known as the debt to credit ratio. This factor looks at the amount of debt that you have in relation to the amount of credit available to you.
• To improve your current balance, try paying down some of your debts so that you have less Debt and more credit available.
• If possible, try not to carry a balance over 20% of the credit limit on any given account.
The Length of Credit History is based on how long you have had a particular credit account. The longer you have had an account, the better it is for your credit score.
• If you have recently opened a new account, don’t worry, over time it will become more and more positively impactful.
* The best way to get value from this factor is to not close out accounts you have had the longest. This will shorten the total lifespan of your credit profile causing your score to decline.
Mix of Credit
A Mix of Credit is the fourth factor and it looks at the different types of credit accounts that you have. It’s good to have a mix of different types of accounts such as a mortgage, auto loan, and credit card.
• A mix of accounts shows lenders that you’re capable of handling different types of debt responsibly.
• Try not to be too top-heavy in any one category. For example, it is not optimum to have 9 credit cards, 1 car, and 0 mortgages.
New Credit is the fifth and final factor that impacts your credit score. Whenever you open a new credit account, it can hurt your score.
• The new credit impact is usually only temporary. If you manage your new credit responsibly, it will become a positive factor in your credit score over time.
• Inquiries can negatively affect your credit score if you attempt to obtain credit too often. You are allowed 45 days in between credit pulls in any given type of pull (Auto, Mortgage) before it will deduct any points.
We hope that this has helped you understand the 5 factors that make up your credit score. Remember, your credit score is important and you should monitor it carefully. If you see any errors in your report, be sure to address them immediately.